RBS signs up to UK's asset-protection scheme

Royal Bank of Scotland (RBS), which today announced 2008 losses of £24.1 billion, has become the first bank to sign up to the UK government's asset-protection scheme, which will offer insurance against future losses in return for a promise to increase lending.

Under the scheme, the UK Treasury will provide protection against losses incurred in one or more portfolios of toxic assets for a minimum of five years. RBS will take the first £19.5 billion of future losses and the government will cover 90% of subsequent losses. Participating banks will be required to enter into legally binding agreements to increase the amount of lending they provide to homeowners and businesses.

RBS has committed £302 billion of troubled assets to the scheme. In return it will pay a participation fee of £6.5 billion to the Treasury and will commit to £9 billion of mortgage lending and £16 billion of business lending in 2009. As of the end of last year, the bank held £74.9 billion in mortgage loans and £20 billion in business loans.

"Participation in this scheme would assist us in reducing risk for shareholders whilst providing greater support for UK customers via increased lending," said RBS chief executive Stephen Hester in a statement. "It would provide increased certainty to the market by limiting potential losses on a significant proportion of our balance sheet."

The asset-protection scheme is a new effort by the UK government to make any further emergency financial support conditional on banks lending certain amounts. "I want to remove some of the barriers and uncertainty preventing the existing banks from lending further. But in return for this we intend to negotiate with each bank a lending agreement," said UK finance minister Alistair Darling on January 19.

RBS has also appointed Nathan Bostock to a new role as head of restructuring and risk, reporting to Hester. Bostock, currently chief financial officer at Abbey National and Alliance & Leicester, will join the group in June. Gordon Pell, currently head of regional markets at RBS, has taken up the role of deputy chief executive.

The global banking and markets division of RBS incurred losses of £2.5 billion in 2008, despite strong performances in currencies and rates, which both rose from the previous year to £1.7 billion and £3.5 billion respectively. Credit market writedowns of £7 billion and trading asset writedowns of £5.8 billion lowered the overall performance of the division.

Following a strategic review of the business, the bank intends to "drastically scale back activity" and exit lending in structured real estate and leveraged and project finance, focusing more on loans, bonds, foreign exchange, rates, commodities and equities.

Lloyds Banking Group, which will announce its annual results on Friday and has already forecast 2008 losses of £10 billion, is widely expected to become the second bank to sign up to the asset protection scheme.

This white paper looks at the Basel Committee's BCBS239 principles, also known as PERDARR (Principles for Effective Risk Data Aggregation and Risk Reporting), which comes into force from 1 January 2016.

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